PARIS – Yesterday, brick-and-mortar retailers – such as Macy’s – led U.S. stocks lower.
The Dow lost about as much as it had gained the day before. Nothing much to talk about there…
When we left off yesterday, we posed two questions:
Shouldn’t your editor (under torture, of course) confess his sins, renounce his apostasy, and register to vote before it is too late?
And… isn’t democracy – for all its faults – still the best game in town?
Readers voiced their opinions in yesterday’s Mailbag. We will give ours… in just a minute.
First, we pause to note that when Donald Trump suggested that he might, as president, default on America’s debt, it brought screams of doubt and pain from all over the financial world.
U.S. debt, said the pundits, was the “glue”… the “foundation”… the sine qua non… of the entire system. Any trace of “renegotiating” or “discounting” it would lead to a huge crisis.
Mr. Trump is right: There is too much debt; one way or another, it will have to be discounted.
He was merely proposing to do it honestly. Out in the open.
But his critics are right, too: It will surely bring about a crisis when Treasury bond investors – including millions of U.S. retirees – realize that they are in for a haircut.
You may have noticed that for months we’ve been coaxing out an insight.
It helps explain many of the strange and startling features of the world’s financial system.
Such as how China’s economy grew so fast… what caused the crisis of 2008… how come $9 trillion of debt is now trading at negative yields… and why growth has now stalled, despite more money spent to stimulate the world economy than ever before.
The short explanation is this: The U.S. financial system – in place since 1971 – runs on debt, not wealth.
A dollar no longer represents accumulated earnings or savings. It comes into being, courtesy of a few keystrokes, when the government spends or someone takes out a bank loan.
It represents the expectation of future wealth, not the recognition of wealth that has already been made. And that dollar will never have real value unless and until the economy grows enough to make it worth something.
The system worked passably well for three decades. But like everything in nature – including a cockamamie money system – there are limits… feedback loops… and unwelcome consequences.
A debt-based system hits the wall when growth slows and debtors can no longer pay. That happened in the U.S. mortgage sector in 2008. It is happening today with student debt, auto debt, and junk corporate debt. (For more, scroll down to today’s Market Insight.)
Government debt will be the last to fall. You know that the feds are always good for the money; after all, they print the stuff. The trouble is, the feds’ money is not always good for you.
Back to politics…
In response to our questions about democracy above, the preponderance of reader opinion is this: It may not be a perfect system… and God knows we may not have perfect candidates… but we should still “put on our big boy pants,” get in line, and do our duty.
Besides, most readers are 100% certain that “The Donald” would make a better president than “The Hillary”… and it will be your editors’ fault (and the fault of other abstainers) if he doesn’t get elected.
Perhaps it was all those years we spent in Washington, trying to get politicians to spend less of our money. (Before setting up our publishing company, we worked at the National Taxpayers Union.)
Or perhaps it was all those years we’ve spent in finance, trying to figure out where the markets were going.
Those experiences have made us cynical. You tell us that “gold is headed to $10,000.” You say “oil can’t drop below $50.” You say Donald Trump will “make America great again.”
“Un-huh,” we answer.
“The problem with democracy,” we explained to a friend yesterday, as she looked at her watch and hoped her phone would ring, “is a matter of scale.”
“We see the New England town meeting as a model,” we explained. “It’s a democracy that seems to work plausibly well. Everybody knows everybody else. They are all families, friends, coworkers.
“So, everybody knows the important details – for example, that the mayor is a scalawag and that you have to stay off the streets when Ms. Jones gets behind the wheel.
“In a small town, you can know real things… and vote on things that concern you all. You can do central planning, too… You almost have to. Where to put the town dump. When to schedule the next town fair. How much to charge for parking in the town’s lot.
“Everybody has to do central planning. When you get up in the morning, you have to plan your day. When you have a business or a family, you have to make decisions… you have to decide what you’re going to do and how you’re going to do it.
“On a small scale, central planning is necessary and effective. And democracy is not bad, either. It helps build the consensus you need to set goals and get everyone behind them.
“But even then, you still get a lot of bullying and bumbling. There are always some jackasses who want to tell everyone else what to do. But in a small community, most people learn to get along with one another.
“In a big community, on the other hand, central planning and democracy are completely different things. People elect leaders they’ve never met… based on slogans and brand advertising. Nobody really knows what they will do, or why.
“And then, the leaders get away – literally – with murder. But people think it’s okay because they think it is just a big version of the town meeting. It’s not. Large-scale democracy is something entirely different. On a large scale, central planning and democracy don’t work.”
We’ll tell you why… tomorrow…
Further Reading: As Bill writes today, “The fed’s money is not always good for you.” But that’s putting it lightly.
In a new interview, he warns how the massive credit money bubble the feds have created is about to pop. And when it goes, it’ll be the kind of crisis Americans have not experienced in over 100 years…
But Bill has some “real action steps” you can take to prepare for – and even profit from – the fall of America’s credit system. Watch here now.
BY CHRIS LOWE, EDITOR AT LARGE
According to ratings agency Moody’s, default rates on these high-risk bonds will reach 4% this year, up from 3.5% in 2015.
That’s the highest level since 2009, in the immediate wake of the global financial crisis.
Still, investors can’t get enough of junk bond funds.
Today’s chart is of the iShares Global High-Yield Corporate Bond ETF (GHYG). It tracks a basket of junk bonds issued by companies around the world.
As you can see, after falling 17% from its 2015 peak to its 2016 trough, it’s shot up 11%.
Resource Expert’s Top Tips for Buying and Storing Gold
We sat down with one of the top resource investing experts in the game for a private interview. In it, he revealed his three best gold stock picks… and shared some tips for how to buy and store gold.
China Is Leading the World in Bond Defaults
Think the U.S. has a problem with junky credit? It ain’t nothing compared to China, where bonds implicitly guaranteed by the government are now going sour.
Why These Popular Valuation Measures May Be Wrong
Warren Buffett’s favorite indicator… Nobel Prize winner Robert Shiller’s CAPE ratio… and Nobel Prize winner James Tobin’s q ratio… all say the stock market is overvalued. Are they all wrong?
Another extended edition of Mailbag today in response to yesterday’s Diary about why your vote doesn’t matter…
Why in the world would you go blabbing about how you’re not going to vote in the coming election? Isn’t that something a person would normally keep to himself?
It’s so negative! Announcing that you are a non-voter is not really the best way to win friends and influence people. Nobody likes a non-voter, regardless of their opinion on the subject.
No wonder you received so much backlash! It’s too sad to hear you think your one little vote doesn’t count for anything. Geez-Louise! Have some faith!– James D.
Then for whom are you going to vote? To vote for Clinton would be complete lunacy, as well as voting for a third-party candidate. That leaves only Trump. He is not my choice either but the way I see it he is the lesser of the two evils.– Don T.
Thank you for standing firm on the ridiculous notion of voting and for setting fire to the “social contract.” Your Diary entries reassure me it is the world that is insane, not I… or at least that the asylum provides good company.
This whole scam would fall apart tomorrow if people stopped legitimizing a system that is very clearly not in their best interest. There’s no voting, protesting, or reforming required. Just living!
“Laissez faire et laissez passer, le monde goes lui meme,” as someone in France said a long time ago.– John W.
I am with you on this voting thing. Not voting is NOT a vote for the other guy.
For example, what would happen if NOBODY voted (perhaps we would have reached utopia)? Does the other guy get all the votes? How do we know who the other guy is, as there may be just as many non-vote votes for the other non-guy as our non-guy?– Brian P.
I too once believed that my voted counted… and voted for the lessor of two evils. But I’ve seen the light.
Since I’ve been abandoned by the Republican Party, I have found that the Libertarian Party best represents me. I’ll be voting for Gary Johnson (hopefully the candidate) and thereby registering my dissatisfaction with the Establishment.– Jimmy A.
Bill nailed it! We’ve been led to believe that in our “democracy” one man / woman = one vote. Every vote counts. Your vote matters. Really?
Tell that to Al Gore. In the 2000 election vs. George “W,” Gore won the popular vote by over 540,000 cast ballots…. but the "Deep State" decided otherwise. Half a million votes didn’t matter.
I’m with Bill – I’m sitting this one out too.– Rick R.
Kudos to Bill for his non-voting stance. Boos to everyone who is tossing a tantrum because of his decision. This goofball theory that a non-vote is a vote for the candidate that they don’t like is the work of those who have been led to the trough by the drifters in a one-party monopoly masquerading as a two-party system.
These deluded folks act as if every voter has a responsibility to vote Republican or Democrat; last time I looked at a ballot (years ago) there were more than two parties represented. Regardless, a no-vote is a choice in this system, despite the bleating of the uninformed.
If the two-party folks want any of us “outsiders” to vote for their candidate, perhaps they should work harder to provide a quality option instead of hiding behind anonymous whining and preaching.– Al D.
In the debate about voting, I find myself siding with Bill. Even if the candidate of your choice should win, I see no possibility that the current trend toward a deeper Deep State is going to change.
The only option that would change my mind (and it’s NOT an option that would be allowed by our masters) is to require an option of “None of the Above.” You would then have a requirement that if “None of the Above” polled higher than any of the candidates, the election would be held again three months later – and NO ONE on the ballot for that office could appear on the ballot for the following election.
This would provide several benefits. First, it would allow those of us who object to the idea of voting for the lesser of two evils to demand that better candidates be offered. Second, it would reduce negative campaigning, which basically comes down to “My opponent is even worse than I am!”– Gordon F.
Bill, you are the Babe Ruth of straight talk. Keep talking!– John D.
And finally this question from a reader concerned about Donald Trump’s debt discount idea…
If “The Donald” renegotiates the debt what will happen to our 401(k) and retirement savings?
Will all the bonds that most of us have as protection in our long-term savings for retirement will LOSE value. I agree that we need to get rid of debt, but not sure that is the way to do it.– Margo P.
Chris comment: The U.S. national debt is equal, to the penny, to the sum of all outstanding Treasury bonds. It’s just basic accounting. If Trump negotiates a discount on the public debt, it means the U.S. government would break its promise to fully honor its bond payments. Treasury bondholders would suffer as a result.
So yes, if you have Treasurys in your 401(k) or retirement account, you would take a hit.